Authorized vs Outstanding vs Reserved Shares: A Complete Guide

As a founder, equity is your most valuable asset. It’s what you use to incentivize your team, attract investors, and build long-term value. But to manage equity effectively, you need to understand how shares work — starting with three key terms: authorized shares, outstanding shares, and reserved shares. They sound similar, but they mean very different things. Here’s a breakdown of each — and how they work together in your company’s capital structure.

Authorized Shares: Setting the Share Limit

Authorized shares represent the maximum number of shares your company can legally issue. Under Delaware law, this number must be specified in the Certificate of Incorporation. It essentially defines the ceiling for your company’s capital structure.

For most startups, the standard approach is to authorize 10,000,000 shares of common stock with a par value of $0.00001 per share. It gives you enough room to allocate equity to founders, early team members, investors, and to set aside an option pool for future hires.

❗Don’t worry about myths you may have heard about high share counts leading to massive franchise tax bills. As long as you use the Assumed Par Value method on the Delaware franchise tax calculator, you’ll be fine.

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Common vs Preferred Stock

Your Certificate of Incorporation can include different classes of stock, usually Common Stock (for founders and employees) and Preferred Stock (for investors). It also specifies how many shares are authorized for each class. For example:

• 8,000,000 shares of Common Stock
• 2,000,000 shares of Preferred Stock

This split becomes important when raising capital, since Preferred Stock often comes with special rights like liquidation preferences or anti-dilution protection.

Most startups start with just Common Stock. Preferred Stock typically comes into play during the first priced financing round (like a Seed or Series A). At that point, you’ll need to amend your Certificate of Incorporation, something that requires both board and stockholder approval.

Outstanding Shares: What’s Actually Issued

Outstanding shares are the shares that have already been issued and are currently owned by shareholders. These include equity held by:

• Founders
• Employees who’ve exercised stock options
• Investors who’ve purchased equity

For example, if you’ve authorized 10,000,000 shares and issued:

• 5,000,000 to founders
• 1,000,000 to employees who’ve exercised options
• 2,000,000 to investors

Then you have 8,000,000 shares outstanding. These are the shares that:

• Determine ownership percentages
• Carry voting rights
• Participate in dividends or liquidity events

They’re also what you’ll see reflected on your cap table and what investors will analyze when assessing ownership and control.

Reserved Shares: Planning for Future Hires

Reserved shares are set aside (usually under an Equity Incentive Plan) for future grants to employees, advisors, and consultants. This pool is often referred to as the option pool.

Investors expect companies to have an option pool in place, and often ask them to increase it as part of a funding round. These shares haven’t been issued yet because they’re just earmarked for future equity grants. Continuing with our earlier example:

• Authorized: 10,000,000
• Outstanding: 8,000,000
• Reserved: 2,000,000

That leaves no unallocated shares. If companies needs more equity for hiring or other purposes, it’ll need to amend its Certificate of Incorporation or reclaim unused shares (for example, from someone who left before their equity vested).

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❗Common mistake: Confusing reserved shares with outstanding shares. Stock options only become outstanding once they’re exercised, but not when they’re granted.

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Reserved shares are an important planning tool. They show you’ve made space for future hires without needing to immediately issue new shares. Once options are exercised, those shares move from the reserved pool to the outstanding category.

Why It All Matters

Whether you’re fundraising, bringing on co-founders, or issuing new grants, understanding these categories is crucial. Every share issued reduces what’s left in the authorized pool. Every reserved share signals potential dilution. And every outstanding share affects voting power and ownership.

Here’s a quick breakdown:

Example Cap Table Breakdown

Let’s look at an example of a typical early-stage Delaware C-Corp with 10,000,000 authorized shares of Common Stock. The company has completed a Seed round, created an equity incentive plan, and made several early hires.

Outstanding Shares

These shares have been issued by the company and are held by existing stockholders. For example:

• 4,500,000 shares to founders
• 500,000 shares to employees (who exercised options)
• 2,000,000 shares to Seed investors

They come with full rights under Delaware law, including voting and participation in any future exits.

Reserved Shares

The company has adopted a formal equity incentive plan (commonly referred to as an employee stock option plan or ESOP) and allocated 2,000,000 shares to it. These shares are reserved for issuance to employees, advisors, and consultants, typically in the form of stock options or restricted stock units (RSUs).

Unissued & Unreserved Shares

The remaining 1,000,000 shares have not been issued or reserved. These shares provide the company with flexibility for future corporate actions, including new equity grants, convertible note conversions, or additional fundraising.

Tips for Founders

Understanding the distinction between authorized, outstanding, and reserved shares is essential for effective equity management. Here are some important things to keep in mind:

• Start with a sensible number of shares: Authorizing 10,000,000 shares with a $0.00001 par value is a common yet flexible default.
• Right-size your option pool: Investors typically want a pool that covers upcoming hires until the next round, usually 10% to 20% of the post-money cap table. Don’t overdo it, or you’ll dilute yourself unnecessarily.
• Keep a close eye on your cap table: Know how many shares are outstanding, reserved, and available. Reserved shares can disappear fast — don’t promise equity you don’t have.
• Think ahead about dilution: Every new grant or funding round dilutes existing shareholders.  Be strategic about how and when shares are issued.

Final Thoughts

Understanding the difference between authorized, outstanding, and reserved shares is fundamental to managing your company’s equity structure. Worse, failure to authorize a sufficient number of shares may require a mid-round charter amendment — a governance burden for the board. As a founder, equity is one of your most valuable tools. Used thoughtfully, it can help you grow and retain top talent while maintaining control of your company’s ownership structure.

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